Description

Austex is an E&P company focused on the Mississippian formation in Oklahoma and Kansas. It has 22,500 net Mississippian acres, 300 boepd (70% oil), $97 million of 1P reserves and $389 million of 3P reserves, versus a current market cap of $42 million ($USD). It is rapidly growing production and only recently issued its reserve report.

Why bother with a small cap Australian traded E&P:

Austex is compelling partly because Mississippian comps trade for over 1P valuations and other rapidly growing Australian traded E&Ps trade for as high as their 3P reserve value. And on a cash-flow multiple basis, Austex trades for less than 2x 2013 cash flow, which is very low for a small cap E&P. Austex only recently began its development work, and should rapidly close the valuation gap, as other formerly micro-cap Australian E&P companies like Red Fork, Texon and Aurora have been able to do. Catalysts include continuing strong well results, higher production numbers, up-listing in the US or Canada (numerous banks I spoke with expressed interest, including the ones that up-listed Aurora) and adding a reserve-based loan.

Assets:

Austex has two key areas, a 5,500 net acre block in Kay County, Oklahoma and 17,000 net acres in North Western Kansas. Current production is almost entirely from Kay County, which appears to be a Mississippian sweet spot, with a recent horizontal well drilled by Range Resources producing over 1,000 boepd sustained over 30 days (AOK has a ~13% stake in that well), and with vertical wells drilled by Austex producing over 100 boepd over 30 days (both over 80% oil).

The NW Kansas acreage is less developed, but Apache recently leased 550,000 net acres all around Austex’s acreage position, which boosted the private market value of the acreage considerably and provided some validation to the resource-play thesis for the area. It also makes it highly likely Apache will deploy meaningful capex to delineate the area, which should benefit Austex. At the current valuation this acreage does not need to work for AOK to be a triple, but it does provide considerable additional upside potential.

Balance Sheet:

Austex recently took on a $7.5 million 10% interest senior secured loan, convertible at $0.15 per share. They are using this money to fund the development of their wells and to grow into a reserve-based loan. This loan will either be refinanced, likely alongside a North American up-listing, or it will be force-converted at $0.25 per share. Austex should have senior borrowing capacity of over $10 million by the end of September, and considerably more by the end of the year. Austex is in the process of spending the $7.5 million they borrowed, but they have not spent much of the money yet.

Comps:

Austex is not only in one of the best parts of the Mississippian play in the Kay County acreage, overall it is the most levered company to the play on an EV/acre basis.

TEV ($MM)

Net Miss Acres

EV/Acre

Red Fork

197

75,000

$ 2,621

Osage (OEDV)

63

7,000

$ 9,029

SandRidge

5,320

1,700,000

$ 3,129

Chesapeake

29,511

2,000,000

$ 14,755

Range Resources

12,019

145,000

$ 82,891

PetroQuest

503

25,000

$ 20,104

Austex

42

22,500

$ 1,867

Particularly relevant comps are Osage (OEDV), which has a similar market cap, Red Fork (RFE AU), which trades in Australia, and Sandridge (SD), which is the largest “pure play” Mississippian focused company. Austex trades at a 29-79% discount to these “pure play” Mississippian comps.

Returns on invested capital:

A lot of the attraction of a Mississippian-focused company is the ability to deploy large amounts of capital into very high rate of return, short cycle drilling activity. Returns in the play are higher than pretty much any other resource play in North America. Sandridge is showing 70%+ IRRs across their acreage, and the wells Austex has drilled to date are on track for IRRs well in excess of 100%, with paybacks in the 3-9 month range. The Range Resources horizontal well cost ~$4 million and vertical wells are costing $700,000. Versus 30 day production of 1,000 bopd and 100 bopd each, these are compelling economics, and will allow Austex to quickly recycle capital and grow production rapidly with less need for outside capital than other unconventional and shale plays. The high returns also provide for a margin of safety, as breakeven is substantially lower than most oil shale plays, and lower cost producers tend to outperform in commodity price downturns.

Catalyst

Catalysts include up-listing to a North American exchange, near term production ramp (trading for ~2x 2013 CF), additional horizontal wells drilled by Range Resources, drilling activity in NW Kansas by Apache, transactions of Mississippian acreage, and adding a reserve based loan to finance development.

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Description

Austex is an E&P company focused on the Mississippian formation in Oklahoma and Kansas. It has 22,500 net Mississippian acres, 300 boepd (70% oil), $97 million of 1P reserves and $389 million of 3P reserves, versus a current market cap of $42 million ($USD). It is rapidly growing production and only recently issued its reserve report.

Why bother with a small cap Australian traded E&P:

Austex is compelling partly because Mississippian comps trade for over 1P valuations and other rapidly growing Australian traded E&Ps trade for as high as their 3P reserve value. And on a cash-flow multiple basis, Austex trades for less than 2x 2013 cash flow, which is very low for a small cap E&P. Austex only recently began its development work, and should rapidly close the valuation gap, as other formerly micro-cap Australian E&P companies like Red Fork, Texon and Aurora have been able to do. Catalysts include continuing strong well results, higher production numbers, up-listing in the US or Canada (numerous banks I spoke with expressed interest, including the ones that up-listed Aurora) and adding a reserve-based loan.

Assets:

Austex has two key areas, a 5,500 net acre block in Kay County, Oklahoma and 17,000 net acres in North Western Kansas. Current production is almost entirely from Kay County, which appears to be a Mississippian sweet spot, with a recent horizontal well drilled by Range Resources producing over 1,000 boepd sustained over 30 days (AOK has a ~13% stake in that well), and with vertical wells drilled by Austex producing over 100 boepd over 30 days (both over 80% oil).

The NW Kansas acreage is less developed, but Apache recently leased 550,000 net acres all around Austex’s acreage position, which boosted the private market value of the acreage considerably and provided some validation to the resource-play thesis for the area. It also makes it highly likely Apache will deploy meaningful capex to delineate the area, which should benefit Austex. At the current valuation this acreage does not need to work for AOK to be a triple, but it does provide considerable additional upside potential.

Balance Sheet:

Austex recently took on a $7.5 million 10% interest senior secured loan, convertible at $0.15 per share. They are using this money to fund the development of their wells and to grow into a reserve-based loan. This loan will either be refinanced, likely alongside a North American up-listing, or it will be force-converted at $0.25 per share. Austex should have senior borrowing capacity of over $10 million by the end of September, and considerably more by the end of the year. Austex is in the process of spending the $7.5 million they borrowed, but they have not spent much of the money yet.

Comps:

Austex is not only in one of the best parts of the Mississippian play in the Kay County acreage, overall it is the most levered company to the play on an EV/acre basis.

TEV ($MM)

Net Miss Acres

EV/Acre

Red Fork

197

75,000

$ 2,621

Osage (OEDV)

63

7,000

$ 9,029

SandRidge

5,320

1,700,000

$ 3,129

Chesapeake

29,511

2,000,000

$ 14,755

Range Resources

12,019

145,000

$ 82,891

PetroQuest

503

25,000

$ 20,104

Austex

42

22,500

$ 1,867

Particularly relevant comps are Osage (OEDV), which has a similar market cap, Red Fork (RFE AU), which trades in Australia, and Sandridge (SD), which is the largest “pure play” Mississippian focused company. Austex trades at a 29-79% discount to these “pure play” Mississippian comps.

Returns on invested capital:

A lot of the attraction of a Mississippian-focused company is the ability to deploy large amounts of capital into very high rate of return, short cycle drilling activity. Returns in the play are higher than pretty much any other resource play in North America. Sandridge is showing 70%+ IRRs across their acreage, and the wells Austex has drilled to date are on track for IRRs well in excess of 100%, with paybacks in the 3-9 month range. The Range Resources horizontal well cost ~$4 million and vertical wells are costing $700,000. Versus 30 day production of 1,000 bopd and 100 bopd each, these are compelling economics, and will allow Austex to quickly recycle capital and grow production rapidly with less need for outside capital than other unconventional and shale plays. The high returns also provide for a margin of safety, as breakeven is substantially lower than most oil shale plays, and lower cost producers tend to outperform in commodity price downturns.

Catalyst

Catalysts include up-listing to a North American exchange, near term production ramp (trading for ~2x 2013 CF), additional horizontal wells drilled by Range Resources, drilling activity in NW Kansas by Apache, transactions of Mississippian acreage, and adding a reserve based loan to finance development.

Messages

Subject

PUDs

Entry

07/25/2012 09:00 PM

Member

briarwood988

Thanks for the write-up. What is the breakdown of 1P reserved between proved developed reserves and proved undeveloped (PUDs), if they give you that?

Briarwood

Subject

RE: PUDs

Entry

07/25/2012 10:20 PM

Member

sugar

More PUD than PDP, although PDP reserves should be greater than the current market cap by year end based on the current drilling schedule and recent well results. Fortunately, the company is growing rapidly and is active in a highly economic resource play with public comps and recent transactions, which provide substantial valuation support and a big margin of safety.

Subject

value?

Entry

07/26/2012 12:30 PM

Member

ncs590

Thanks for the write-up Sugar, where do you think this should trade?

Subject

Austex stock price/valuation lagging production

Entry

01/26/2013 07:25 PM

Member

sugar

Austex's stock price has not tracked its production numbers. The company is expecting another 100%+ growth year. At some point the stock should respond. The company has ~300 undeveloped locations vs 16 developed, so it has years of running room. Austex differs from Gale Force in that there is much less risk - it is simply drilling the 17th, 18th, etc well in an existing field that has already been delineated, and it has the funding in place to execute on the development program. Also, it is getting close to the 1,000 barrel/day level where investors seem to start to care about a company. An example of a company/stock that has gone through the transition Austex is going through is Lynden energy (LVL.V), which has more than doubled from Austex's current valuation to Lynden's current valuation as it crossed the 1,000 boepd mark over the past year.

Subject

aok

Entry

01/06/2014 06:27 PM

Member

sugar

This has taken longer than I'd hoped to play out, but seems to (finally) be working. Production is over 1,000 boepd and could be 3,000 boepd by the end of 2014. Michael Stone (of Herbalife fame, he took it private and then public again) now owns 30% of the company and is buying more stock every day. Update reserve reports indicate at least a $250 million value on the properties, implying at least a double from here. And as this grows, the stock could go parabolic, to a stupid high valuation that other small growth companies get (think Synergy Resources, Ring Energy, etc). If it traded like SYRG it would be at 3-9x its current stock price.

Subject

RE: RE: stock up ~35% since update last week RE

Entry

01/30/2014 02:14 PM

Member

aagold

Hmm... that question about the October 11.75% preferred convertible deal at $0.15/share (at the money) is quite interesting, particularly if sugar's fund participated in that particular financing. Seems like it was quite a sweet deal.